More That Glitters

SUNNY SIDE

Over 2013, the Dominican Republic managed to achieve real GDP growth of 4.1%, according to the IMF, slightly up on the 3.9% recorded a year earlier. In broad terms, the economy is split between services (52.2%), industry (25.8%), the so-called “taxes less subsidies on products” category (14.4%), and finally agriculture (7.6%). The long-term GDP growth rate for the country over the 1991-2013 period averaged out at 5.7% according to World Bank figures, exceptional not just in the Latin America region, but in the frontier market universe as a whole. This is not to say that all things have gone swimmingly over that period. In 2003 a banking crisis erupted, that saw the Dominican peso (RD$) collapse, banks go out of business, and public debt double. In many ways, the crisis acted as a reality check on some of the excesses of the late 1990s, when high-digit growth rates were seemingly de rigueur; cooler heads have helped move the economy forward at a more sober pace since. Since 2003, when per capita GDP fell to just $2,344, the figure had more than doubled to $5,822 by 2013, demonstrating the fast pace of development the island nation of 10.4 million has experienced.

However, 2014 appears to be a year when growth is on a charge, with 7.2% reported over the first half of the year, when using the 2007 statistical base. The Ministry of Economy, Planning, and Development outlined a lower figure of 5.2% GDP growth when using an earlier 1991 statistical base, with the key growth sectors over 1H2014 including minerals (20.1%), financial intermediaries (14%), hospitality (12.6%), construction (10.3%), and commerce (5.5%).

Other key indicators are also heading in a sound direction. Consumer price inflation (CPI) has calmed down significantly from the 7.8% seen at end-2011 to 2.9% in YoY terms in October 2014. In response to the improved performance of the tourism and gold mining sectors, the country’s current account deficit (CAD) has fallen from 8.4% of GDP in 2010 to some 4.2% by end-2013, much on the back of a surge in gold exports, which now make up 2% of GDP according to the IMF. Unemployment has also responded, falling from 7% at YE2013 to 6% in October 2014. The Medina administration has set itself the target of creating 450,000 new jobs before its term expires in 2016, and credits itself with the creation of over 250,000 since returning to office in 2012.

The late 2014 fall in the global oil price should also come as welcome news to the Dominican Republic, as much of its power generating needs are reliant on fuel oil and, to a lesser extent, gas and coal. In FOB terms over 2013, the two main fuel categories for refined and raw products formed some 31.39% of the country’s total bill ($4.36 billion), making it the largest import category by far. In a late-2014 report, the CBDR estimated that should the oil price remain at an average of $74 per barrel for the 2015 period, the Dominican Republic’s fuel import bill will fall by $1.2 billion, nearly bringing the country into current account surplus territory.

The strength of free zones on the manufacturing side also shows up in the balance of payments figures. Of the total $9.65 billion in exports recorded by the CBDR in 2013, some $5.03 billion (or 52.1%) emerged from the Dominican Republic’s 57 free zones. Initial figures from 1H2014 show exports up 2.48% to $5.01 billion in YoY terms, with the free zone percentage of exports slipping to 50.39%, indicating a potential softening in the export textile sector. The Dominican Republic is hoping that a combination of geographic centrality and low-cost workforce will combine with its network of free trade agreements (FTAs) to boost its manufacturing potential through its free zones. Agreements such as the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR) with the US and FTAs with other countries in the region through CARIFORUM as well as the EU via the European Association Agreement (AAE) are also helping to bolster exports.

Tourism has long been a key provider to the Dominican economy, contributing some 14.7% of all FDI in the country, the third largest after retail and wholesale trade (20.5%), and the mining industry (15.6%) according to preliminary figures from the CBDR for the end of 2013. In terms of arrivals by foreigners and non-residents alone, their numbers grew from 4.56 million in 2012 to 4.69 million in 2013, with 2014 shaping up to follow this growth trend. The Medina administration plans to increase tourist numbers to 10 million by the end of the current decade.

Another major source of funding for the Dominican Republic is the remittances sent from expatriates overseas, which were worth $3.33 billion to the local economy over 2013. The Inter-American Development Bank (IDB) estimated that the Dominican Republic was the fifth largest receiver of remittances in the Latin American region, with migrants in the US being the source of around three-quarters of the money sent home.

Communications also feature as a key sector of the local economy, representing 16.2% of GDP in 2013 according to the CBDR, and featuring as the largest component of the service economy. The government announced in early 2014 that it would be looking to install a national broadband network over the coming five years to cover 3,000 square kilometers, in an effort to improve internet access for SMEs and lower and middle income earners, especially for those in provincial areas. With most of the telecoms sector in private hands, it will be of interest to see how this new network architecture will be handled by the public sector.

Although showing strong growth over 1H2014 of 14%, the finance sector has a long way to go before it can act as a more effective part of economic development. In 2013, the finance sector represented just 4.4% of GDP, under even the 4.9% recorded for real estate or transport and storage, let alone that for hotels, bars, and restaurants (6.3%).

DIG FOR ENERGY

Mining is proving to be one of the more interesting, if controversial, growth sectors. According to the CBDR, mining activity accounted for $1.41 billion in export revenues, with gold accounting for $1.19 billion of that. The rest is split between silver ($60.28 million), and the Dominican Republic’s more traditional mining resource ferronickel ($157.41 million). The Pueblo Viejo gold mine, joint operated by Barrick Gold and Goldcorp of Canada, has revolutionized the local mining industry, and provided some much needed revenues for the state’s coffers. More importantly, the gold mining project represented the largest quantity of FDI to come into the country for a single-ticket item—some $4 billion. The creation of a Ministry of Energy and Mines as well as the rejection of national park status in an area with extensive ferronickel deposits—Loma Miranda—also boosted investor sentiment over 2014.

The new Ministry of Energy and Mines has another problem that it and the administration will have to deal with: payments to private electricity generators. In December 2014, the Dominican Electrical Industry Association (ADIE) claimed that the government now owed the generators $1.05 billion in arrears for energy provided to state-owned energy company, the Dominican Corporation of State Electricity Companies (CDEEE). The CDEEE is set to pay the energy companies $400 million in back payments, more than covering the bill for 2014 and helping to pay off the overhang from previous years.

As well, the government is looking to resolve another energy-related issue—it hopes to repurchase some $4 billion in debt the Dominican Republic owed Petróleos de Venezuela (PDVSA) for past concessional oil purchases through the launching of a $1.7 billion international bond with the current debt holders, Goldman Sachs. As the Dominican Republic’s economy is on the rise, this may be the right move to bring down consolidated public debt, which was set to rise above 50% of GDP at end-2014, by giving it a $2.3 billion haircut. As the debt only attracted a 2% interest rate under the old PDVSA terms, even Goldman Sachs may look upon this deal with favor.

Any reduction in consolidated public debt will be welcome, as it has risen some 18 percentage points since 2008. In 2012 the public sector’s consolidated deficit represented 7.9% of GDP in a single year, much because of disputes over royalties issues with the new gold mining consortium. By 2013, this public spending position had repaired to represent just 5% of annual GDP that fell into deficit, with the government aiming to reduce that figure, and the 50% plus worth of public debt in GDP terms on its books, through targeted fiscal policies that only ring fence education spending. And with the Medina administration hoping to increase education spending from the current 2.8% of GDP to 4% to improve the potential of the Dominican Republic’s future workforce, it will need all the good winds emerging from a low oil price environment that can arrive.